Fidelity Guarantees insurance relate to situations where employees handle their employer’s money or other property
- Handling cash as a cashier or sales assistant does; or
- Being involved in record keeping, in the way that an accountant, computer operator or other property manager does
Employee can divert employer’s money or property to somewhere (employee’s own pocket/account). This can go unnoticed for a long time and can involve substantial amounts of money. Money policy does cover limited theft by employee but it has to be discovered within 24 hours.
FG policy involves 3 parties:-
- The insurer
- The insured (the employer)
- The applicant or insured person whose fidelity is guaranteed
Insurer becomes a guarantor in respect of the insured person. If the insured person commits a fraud against the employer, the guarantor make payment. Some employees may be required to obtain a `guarantee’ as a condition of their employment, example:-
- Stewards in clubs, commercial travelers, collectors, public house managers, bus drivers, cashiers, checkout operators, sales assistants, treasurers
These people work independently collecting employer’s money and are subject to temptation. Examples of employees who do not handle cash but are still able to commit fraud and will be able to divert money or property to their own use are:-
- Book keepers, accountants, procurement and store officials, computer programmers, computer operators, directors and managers
because these employees have access to the systems operated by employees and they can manipulate these for own gain. They can divert large amounts of money at one go or small amounts over a long period.
The cover applies during:-
- The currency of the policy
- During the `discovery period’ – a period during which theft committed during the currency of the policy and discovered 24 months after termination of the policy, or the guilty party resigns , leaves the employment or dies
The cover will indemnify the insured in respect of loss of money or other goods and property caused by the fraud or dishonesty of the insured person. Cover will often include:-
- Auditor’s fees incurred in substantiating the amount of loss
- The cost of rewriting or amending computer programmes to avoid further losses
Policy may cover fraud committed before policy commenced but not discovered until the policy operates. If there has been continuous FG policy the loss is covered. Even if the risk is transferred from one insurer to another the benefit is not lost. The fraud must be discovered outside the discovery period of of the superseded policy. Existing insurer may cancel out the discovery period but the new policy will have the `interlocking’ provision. FG policies may be subject to an excess or deductible.
There are a few types of fidelity policy:
a) Named employee basis
- Policy is on a named basis with a limit per named person
- Deals with individual employees holding specific position
b) Blanket policy basis
- covering all employees in a specific department or specific jobs without naming employees
- Is suitable where the jobholders keep changing from time to time.
- the rate will be determined by the amount of money passing through these department
- policy will have limit of indemnity any one loss and an aggregate limit over all losses
c) Position basis
- usually arranged by local authorities which guarantees the holders of specified positions within the authority
- these are often called government bonds
- they tend to cover mistakes as well as dishonesty
In rating and underwriting the risk, there are 2 factors to be considered:
a) Employee
- background of the employee with confirmation from previous employers
- a form is used to get this confirmation from the previous employer
- new employers are now required to get written reference from the past three years employers and to pay special attention to apparent gaps in employment
- reference may have to be produced in the event of a claim
- if there is no reference obtained the limit of indemnity will be reduced say to about 10%
- Employee’s financial background:
- insured person’s financial situation is also of importance
- this will help detect any potential future dishonesty
- if there is large debts, big mortgage and no savings, heavy family commitment, there is a chance of temptation
b) Employer’s responsibilities (these are what Mr John will have to take into account to enjoy lower premium rates)
- insurers do not dictate to employers on how their system should work
- in the proposal form, insurers will find out the checks built into the systems to prevent fraud
- if these check have flaws, these should be put right
- these improvements may become warranties or endorsements on the policy to ensure that the improved state of affairs continues
- breaches may happened and cover of up to 5% excess is available for inadvertent breaches
- For previous losses
- insurer will want to know if there have been previous losses
- insurer will examine reason for such losses and the actions taken to prevent recurrences
- Recruitment Policy
- insurer will want to know how thoroughly the employer investigates the background of the potential employees
- suitable checking procedure should be in place
c) Other considerations
- The policy carries 2 particular conditions:-
- first it will be a condition precedent to any claim that any dishonest employee be prosecuted
- The second feature relates to the rights of subrogation, whereby:-
- the employer will be indemnified and
- the insurers will retain the right to attempt recovery of their outlay from the wrongdoer.
- Computer Fraud
- it is possible for outsiders to electronically extract funds from a company or its accounts
- agency and consultant staff can also be dishonest
- this risk can be covered by an extension to the FG policy covering computer fraud by non-employees
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